Mortgage securities to face new scrutiny

Lawmakers are finally breaking up the cozy, destructive relationship between banks that packaged residential mortgages for resale and the credit-rating agencies that so ill-served investors and, ultimately, taxpayers.

Fitch, Standard & Poor’s, and Moody’s Investors Service — an AAA oxymoron — were supposed to do arms-length assessments of mortgage-backed securities that were subsequently minced into some of the most toxic financial paper in U.S. history. In fact, the agencies were rubber stamps peopled with many analysts ambitious for high-paying jobs that grateful banks might offer as a reward for an A-plus rating.

Banks shopped their securities around until they found the analyst who would treat their junk most kindly. The banks paid the ratings agencies.

Thursday, U.S. Sen. Al Franken of Minnesota, who knows a joke when he sees one, successfully introduced an amendment to the financial regulation bill that would create a ratings clearinghouse within the U.S. Securities and Exchange Commission. The new entity would designate a reviewing agency for new securities, taking care to avoid potential conflicts of interest. Banks could seek a second opinion outside the SEC, but investors would be entitled to an explanation when the two opinions conflicted.

The amendment passed 64 to 35.

The reform resembles another enacted in the wake of the dot-bomb bust of a decade ago, when stock analysts with the ethics of a card cheat were hanging sky-high ratings on new stocks that they privately referred to as junk, or worse. The aim was to bring into the investment banks they worked for as many lucrative public stock offerings as they could.

Now, most stock analysis is done independently, and much of it is freely available on the Internet.

Another amendment, co-sponsored by Sens. Maria Cantwell, D-Wash., and George LeMieux, R-Fla., attacks the special status accorded the ratings agencies by federal legislation enacted in the 1930s and ’40s.

As “nationally recognized statistical ratings organizations,” Fitch, S&P and Moody’s in effect had charters. How they rated bonds and other securities determined whether those investments were suitable for banks or other institutions. By implication, their blessing was akin to that of the federal government.

The LeMieux-Cantwell amendment removes that status and directs federal regulators to develop uniform standards with which any company can measure a security’s quality. The favored three would have to share the business with competitors just as capable of using the new yardsticks as they.

Meanwhile, New York Attorney General Andrew Cuomo is investigating whether the banks misled the rating agencies about the quality of the mortgages they were reviewing. So the relationship was so corrupt that they had to lie to the people that were already in their pocket?

Do the credit agencies feel used?

The taxpayers surely were.